If you owe taxes to the Internal Revenue Service (IRS), you’re not alone. In fact, for the 2022 fiscal year, the IRS reported collecting more than $98.4 billion in unpaid taxes, interest, and penalties for federal income tax returns filed with additional tax due.
If you’re facing the daunting task of figuring out how to pay taxes owed to the IRS, one option is taking out a personal loan to cover the amount you owe.
Taking out loans for tax debts is a solution that may work better for some borrowers than others. Consider your situation carefully first, so you don’t end up saddled with even more debt.
It’s possible to use a personal loan for tax debt, since you can use this type of loan for just about anything you want.
Personal loans are typically unsecured debt, meaning they don’t require collateral, so they normally have higher interest rates. While the rate you’ll pay on a personal loan depends on several factors, including the lender and loan amount, you generally need a good credit score to qualify for a lower rate.
Related: Learn more about getting a personal loan
There are several advantages to paying your taxes with a personal loan. Consider the following:
Although there are benefits to using personal loans for tax debt, it’s crucial to look at the downsides as well.
Personal loans aren’t the only option available for repaying tax debt. Other common options include setting up an IRS payment plan or using a credit card. Each option has its own benefits and drawbacks, and it’s important to weigh them carefully when choosing the best one for you.
The table below can help you compare these different options.
| Option | Annual percentage rate (APR) | Repayment terms | Fees | Penalties |
|---|---|---|---|---|
| IRS payment plans | Currently 4% (can change quarterly) | Normally up to 72 months | Setup fees range from $31 to $225. Some fees can be waived or reduced if you qualify as a low-income taxpayer, and short-term plans don’t have setup fees. | The IRS will continue to charge interest and certain penalties until your loan balance is paid in full. |
| Personal loans | Varies based on lender and credit score, but typically 5-36% | Usually 1 to 7 years | Varies by lender but may include origination fees or application fees | Many lenders charge penalties for late payments. Some charge prepayment penalties if you pay the loan off early. |
| Credit cards | Varies based on credit score, averages 20.92% as of April 2023 | Varies | The IRS uses third-party payment processors for credit card payments. The fees charged range from 1.85% to 1.98% of your payment amount, subject to minimums. Some credit cards charge an annual fee | May charge a penalty rate if you miss a payment |
So which option is best? It depends on your situation.
If you owe less than $50,000 and can pay your tax debt in full within 72 months, an IRS payment plan may be your best option. The interest rate is usually lower than credit cards or personal loans, and you won’t have to worry about maxing out your cards.
You may need to pay a setup fee when applying for an installment plan. You can minimize the fees by applying online at IRS.gov and having your payments automatically deducted from your checking account. If you qualify as a low-income taxpayer, you may be able to have the setup fee waived entirely.
A personal loan may be the next best option if you owe more than $50,000 or don’t want to use an IRS installment agreement because interest rates and payments on personal loans are usually fixed. Be sure to shop around to get the lowest interest rate and fees.
Credit cards typically have the highest interest rates of all three options. However, if you can take advantage of an interest-free promotion and pay off your balance within the introductory period, paying your tax debt with a credit card might make sense. Keep in mind that the IRS uses third-party payment processors for credit card payments, and those fees increase the amount you owe significantly if you have a large tax debt.
You could face penalties and interest on the unpaid balance if you can’t pay your taxes. The late payment penalty is 0.5% of the unpaid taxes for each month your balance isn’t paid in full, up to 25% of the total amount owed. In addition, the IRS charges interest on the unpaid balance, which compounds daily and is currently set at 4% per year.
If you haven’t filed your return because you can’t pay the tax you owe, putting off filing won’t help your situation. The failure to file penalty is 5% of the unpaid taxes for each month your return is late, up to 25% of the total amount you owe.
If your return is more than 60 days late, the minimum penalty is $435 or 100% of the unpaid tax, whichever is less. In addition to the penalties, you’ll also be charged interest on the unpaid balance.
You have several options if you aren’t able to pay your taxes — even with an installment agreement or personal loan. For example, you can:
No matter the situation, it’s crucial to communicate with the IRS and try to work out a payment plan or other solution to avoid penalties and interest from piling up. Ignoring the issue will only make it worse, and the IRS has the authority to garnish wages and seize assets.
Related: Learn more about getting a personal loan